Budget 2015: Substantial financial savings to get channelled into equities,says Manoj Nagpal

By Manoj Nagpal

The overall composition of savings in India has predominantly tilted towards debt, gold and real estate, with equities being a marginal component. Don’t get me wrong; we Indians love equities and like to speculate in equities for quick gains, but when it comes to longterm investments, equity is the least preferred.

This is reflected in the reducing ownership of equities by retail investors, both in the composite holding of direct equities and intermediation from institutions like mutual funds and insurance companies. It is estimated that this composite holding has now fallen to just around 15-17% of the market capitalisation and, more importantly, a significant part of the direct equity holding by retail investors is not in blue-chip quality stocks. This has led to an overall notso-good experience for investors in equities and is now manifesting itself in reduced financial savings rate.

The Budget has deftly handled this situation and brings back the focus on financial savings. The finance minister spoke about the gold monetisation scheme and the sovereign gold bond to route back savings to financial instruments, but the big hurrah of the Budget lies in the rechannelling of long-term savings pool into equities.

In the brief No 9 released as a part of the Budget releases, a new investment pattern has been announced for provident funds, superannuation funds and gratuity funds, which will be effective from April for all non-government funds. The new investment pattern mandates a minimum of 5% allocation to equities or a maximum of 15%, either directly or through exchange traded funds (ETFs) or index funds.

This is a significant departure from the earlier pattern, when the mandated investment pattern used to have an enabling provision of up to 15% investment in equities and which was stymied by the ministry of labour for many years by not enabling the provision.

The new investment pattern will ensure that a minimum 5% allocation goes to equities and will be a game-changer on how long-term investment savings pools are invested in India. It will also lead to enhanced returns to these investors given the long-term benefits which such an allocation can bring. This may currently look like an innocuous change but is a significant mindset shift in the polity and the method of implementation, and it will lead to a radical change in the investment pattern over the long-term.

The other change in the Budget is allowing an option between Employees’ Provident Fund (EPF) and National Pension System (NPS). This is an extension of the above thought of bringing long-term savings pool to market returns, which will lead to a significant migration to NPS once investors see the benefits of an enhanced allocation to equities and more specifically in a shift from guaranteed returns to market returns.

The dichotomy and the brilliance of the Budget lies in the fact that Arun Jaitley has created one more instrument, Atal Pension Yojana, which takes a step backward by offering an assured return in the form of a quasi-deferred annuity but with the same thought process. Atal Pension Yojana is a mandatory conversion of NPS-Lite (Swavalamban). Thus, effectively, all the 38 lakh NPS-Lite account holders will mandatorily opt in (unless they specifically opt out) to Atal Pension Yojana, which will be open only to investors in the age band of 20-40 years and offer a deferred annuity with regular savings programme.

In effect, the FM has ensured the shift towards financial savings and more importantly towards equities in the long-term investment savings pool, whatever your inclination maybe. This will be an extremely important and positive move for equity markets which will significantly alter the savings habits of retail investors and will form the base of a formidable domestic savings pool in equities.